Making Sense: June Market Update

Making Sense

Market Update | June 2026

Recorded on June 24, 2026

Amy: Hi, I'm Amy Thomas. Today is June 24, 2026, and I want to welcome you to our monthly market update series. Today, Phil Neuhart and Blake Taylor, members of our Market and Economic Research team, will take a deep dive into what's happening in the markets and the economy.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This should not be considered as tax, legal or investment advice. And with that, Phil, we're ready to go, so I'll turn it over to you.

Phil: Thank you, Amy, and welcome, everyone. And Blake, thank you for joining us again with Brent away. What are we going to cover today? There's plenty to talk about in the world, and plenty has changed really in the last month.

One, we want to talk about our midyear outlook and review inflation. What's happening with Federal Reserve policy, which we've seen some real movements there in recent months and household spending as well. On the market side, of course, equity markets, plenty happening. Corporate earnings, we have an earnings season coming up. I want to make sure we discuss what expectations are there. Valuations, which are still fairly rich, but maybe not as rich as they were recently. And of course, fixed income as well. So let's jump right into the economy, Blake.

Blake: Yeah. Well, somehow, we're halfway through the year, and it's been a pretty exciting first half of the year. Some of the things that stick out to me, the Hurricanes won the Stanley Cup.

Phil: Absolutely.

Blake: We sent people back to the moon and back.

Phil: Near the moon.

Blake: Near the moon.

And a lot went on in the world and in the economy and the markets. The biggest thing, of course, was the massive conflict in the Middle East and the effect that that had on energy prices.

Twenty percent of the world's oil flows through the Strait of Hormuz. That was disrupted almost overnight. But look at what happened in the first half of the year in the top panel of this exhibit here. The economy, the outlook for 2026 wasn't changed as much as one might have thought, given what we saw in the middle of the first half of this year.

Look at GDP growth. In the beginning of the year, professional forecasters penciled in 2.0% growth rate for 2026. Now, after everything that's happened, shocks, massive AI spending, those things have balanced out, and now we're looking at 2.1%. Very little changed.

Same thing with the unemployment rate. Even though there was talk in March and April and even into May about a global recession coming from this energy price shock, the unemployment rate penciled in at 4.5% for the end of this year on January 1st. Now we're looking at 4.4%. Same thing with monthly job growth, high 60s, now low 60s, very, very similar.

So the takeaway is despite a pretty big surprise for the first half of this year, the outlook for the full year is little changed from where we were with one exception, and that's inflation. At the beginning of the year, forecasters saw 2.8% as the total year-on-year inflation rate. Now, given what's happened with energy prices and other factors that we'll get into, we're looking at mid threes for the inflation rate.

Blake: So what about markets? Well, the markets are kind of taking their cue from the economy to a certain extent. One, the S&P 500 forecasts from January 1st to the latest have moved higher. Not too surprising given the remarkable earnings growth, which we'll talk about more later.

And really that feeds into why GDP hasn't moved down because of CapEx on artificial intelligence. Federal funds rate, that has moved up. Not too surprising given the move up in CPI inflation. We'll dig into this more later, but certainly expectations for the Fed are leaning more hikes than cuts compared to where we were beginning of this year.

Well, with the Fed not cutting as much, inflation higher as you would expect, expectations from the 10-year treasury yield have moved up and crude oil is higher as well. Now, it's well below the highs we saw during the war, but certainly higher than where we started the year as we'll show just here in a second. So speaking of that, here we have WTI futures crude oil prices on the left side. This remarkable spike up, $110 near a $120 for Brent crude.

Now you're down below sub $75. I will point out, still well above where we were late last year, early this year, but obviously an improvement. And you see that taking or making an impact on market inflation expectations.

On the right, this is just market expectations via the swap rate. Look at that 1-year number, Blake, and the dramatic move lower back into the twos in terms of inflation expectations. This plummet, we went back and looked at this yesterday, this plummet ranks up there with the great financial crisis, the 2022 Fed tightening that really crushed that exceptional inflation we had after the pandemic, and then the pandemic forced lockdowns.

This is not normal. This is unique. Why is that? Because it was an exogenous event, which was a war in the Middle East that, knock on wood, that risk is being removed.

And so that exogenous event is kind of a light switch on and then off, kind of like the pandemic, where this isn't a slow-moving inflation expectations thing. This has to do with a supply shock to the price of crude oil.

Blake: And for the second year in a row, it was a huge unwinding of risk and almost overnight, where there's a lot of risk priced in, a lot of pessimism and then a surprise event happened. In this case, it was the war ending much more quickly and just a dramatic repricing of risk.

Phil: Yeah. Reminiscent of tariffs last year. So what does all this mean for inflation? Here, we're showing on the left side longer term core inflation. All core inflation is, is you exclude the impact of food and energy, which this can be frustrating to consumers because we pay for food and energy, but it is something that monetary policymakers do watch.

So where are we? Obviously, long term, you can see we're above where we were really during the 2000s and 2010s, well below the highs after the pandemic, but running above the Fed's target of 2%. And as you can see on the right side, we really have been running above that target for 5 years now. We talked about this a lot.

There is such thing as inflation regimes. We had a low inflation regime, particularly after the financial crisis. Why is that? We had a really weak economy for many years.

Now, it would appear that we just have a higher inflation regime. These things do get into the sauce. Companies raising prices gets into the sauce, and all of a sudden you see that happening more and more. This is a major frustration for consumers.

And yes, inflation is running, let's call it 3% blended between these two measures. That is better than 9%, but it's still up, and consumers pay prices. They don't pay inflation rates. This does remain a challenge for the Fed.

But as we point out on the right side, the Fed cut in 2024, they cut in 2025. And the truth is, yes, inflation popped up a little bit in one measure of late, but really, we just kind of moved sideways. We are not seeing a major pickup in inflation, but we do think we're in this regime of 2.5% to 3% core inflation for some time.

Blake: And what does that mean for the Fed? The Fed has moved from expectations for cutting interest rates to hiking interest rates. So 4 months ago, right before the Iran war began, markets were priced for the Federal Reserve to cut rates three times over the next 12 to 18 months. So that would have been the third consecutive year of a step lower in interest rates.

What's happened now is that has reversed. And higher inflation, a stronger economy and new leadership of the Fed have led markets to believe that now it's more likely that we'll raise rates rather than cut them.

So a few things. As you said, inflation is no longer improving. This last mile of inflation back to 2% is proving to be the hardest. And what we've seen is the new leadership of the Fed, Chairman Kevin Warsh, came in and he has made some changes to the way that the Fed might be conducting monetary policy.

We went into this in length a couple weeks ago in a podcast that we recorded, but to reiterate some of it briefly, one of the main things that he changed is how the Fed is going to communicate to markets and the public about their intentions. So for many years until now, the Fed maybe overcommunicated with the way that it guided markets and the public and companies and households to expect what was going to happen with markets and inflation.

There was a point where there was a joke that the Fed would talk about talking about raising or lowering interest rates. Now Chairman Walsh has come in and he has changed that. And the most notable thing we saw is in the Fed's policy statement, it used to be 300 words or so. He chopped that just to a couple of paragraphs, but there's one thing that he added. He didn't just delete language. At the very end of that statement, he added a sentence that said, "The committee will deliver price stability."

So markets read that as, "Okay, maybe we thought there was going be more balance between employment and inflation." Of course, the Fed is mandated by Congress to try to deliver maximum employment and stable prices. So I think what we saw was a little more focus on that price mandate. And how do we bring prices down? It's typically as simple as you're raising or lowering interest rates. There's a little bit more that goes into it, but what the market has seen is, given economic conditions where they are, we're now looking more at hiking interest rates.

However, some of the things that are driving inflation probably are not things that the Fed can control by changing their overnight policy rate. First and foremost, this seemed like more of an issue 4 to 6 weeks ago, the oil price. The Fed can't raise interest rates and cause oil to flow through the Strait of Hormuz. But a newer thing that we've been focusing on because it has evolved so rapidly is the price of memory chips. Storage and memory, what goes into computers and smartphones and into servers and datacenters. I checked these numbers, and they are actually correct.

Five hundred percent inflation rate in memory chips that go into mobile phones, and three- to five-time increases in the price compared to 1 year ago for what goes into personal computers and servers and solid-state storage.

Phil: And you really could argue that the cost of memory, the cost of processors in our current economy, it is the new commodity. Think about after the pandemic when there were shortages of chips, that found its way into inflation. Very hard for the Fed to control this global marketplace.

Blake: The word I'm going to take from what you said is shortage. The Fed can't print more chips. They can't move more oil through the Strait of Hormuz. And what this is, is it's probably a mix of a supply shock and a demand shock. Supply because there's only so many chips that can be made of different types. Demand, we have these hyperscalers that are consuming enormous amounts of this computing equipment, and that's caused these manufacturers to deliver more to those servers and datacenters and maybe not as many available for the computers and smartphones that are that are more focused on households. But the point is, this will make its way into consumer price inflation, and we're not so sure that the Fed raising interest rates is going to bring down the price of these chips.

Let's move and talk about households. What is going on with incomes on an aggregate level? Nominal income has decelerated, but it's still stayed at a pretty decent pace. That's what this blue line is showing. How much money compared to last year is going into households' pockets? It's still in the nice 3% range.

But after adjusting for inflation, that's basically at zero or below. And our studies have found that when you look at small businesses and lower-income households who are more exposed to inflation, that number is actually now below zero. So even though we have a strong economy, even though GDP is expected to grow at 2%, what we're seeing is that when you look at different households, things are a little bit murkier below the surface.

And we just spent some time the last few days looking through what did executives say in their Q1 earnings statements and calls. And a persistent theme, particularly around some of the consumer-focused companies, was executives are saying they're seeing these two different consumers, which you're going to get to in a moment. And one of the ones that stuck out to me is the executive of a major retailer said that for the first time in many years, we're seeing the number of gallons of gasoline that people are pumping in their cars has fallen below 10. So his point is that there are more people who are coming and not filling their tank all the way up. Maybe there's not enough in the account to do so.

Phil: Inflation takes a bite out of the consumer, and it certainly hurts middle-income and lower-income consumers more than higher-income. So let's look at spending. We just showed income and as a reminder, inflation adjusted near zero. Inflation-adjusted spending is still kind of trending around that 2% level. Well, why is that?

One, we have two consumers, talk about that more in a moment. But two, we have seen credit card usage really explode since inflation exploded a few years ago. By the way, that's finding its way into delinquencies. So consumers are spending beyond their income. Okay.

Blake: And we see that with the saving rate declining month on month.

Phil: So there is a lever you can pull, and the first lever you pull of course is your credit card.

So let's talk about this concept of two consumers. We've shown this a lot of different ways over the last couple of years, but here we're showing on the left side, this is the change in consumer confidence since 2024 by different income cohorts.

So if you look at lower income, $50,000 to $75,000 households, you'll notice that's the dash line is really, one, weak, and is weakening as gas prices have gone up particularly. When you look at other cohorts, $75,000 to $100,000 and $125,000 and over, they're not particularly strong compared to where they were at points of 2024 but have actually been improving.

I don't think it's a coincidence that you have a stock market that until very recently, recent days, was hitting all-time highs. Higher-income folks own stocks. They tend to own their home, which of course has seen a lot of appreciation, and you see those positive wealth effects. So it's not that confidence among higher income is sky high, you can see that versus the history, but it's not weakening as much.

Why is that? They have impacts to their wealth that are outside of things like inflation. So let's look at this another way. If you ask households, are you planning to take a vacation in the next 6 months?

And we have this broken out within the US domestic or foreign travel. Within the US, it has weakened pretty sharply so far this year. Foreign travel weakened a little bit because it's moving sideways. What's the differential here? Higher-income folks are more likely to take a trip to Europe or Asia, et cetera. Lower-income are more likely to drive somewhere, right? So gas prices are taking a toll in terms of plans to take vacation. With crude oil falling recently, hopefully surveys like this improve. But we see this on the road.

We hear from our clients all the time. We do have two consumers, and it's something that our view is it makes our economy a bit top heavy. If we see something really impact that higher income consumer, for example, a major negative wealth effect, certainly the next recession could be worse than expected. That's not where we are today, though. Certainly not where we are today.

Blake: One of the most important elements of the economy is the labor market, and the labor market is doing all right. Our view for several months has been that companies are in this low-hire, low-fire setting, and we think that that's still the case today. Hiring has picked up a little bit in the last few months from an anemic pace over the last few quarters, but in our view, the labor market is still actually probably losing some momentum. So still doing all right but weakening just a little bit month by month as time goes on.

We'll show this in two ways. On the left side, we're looking at the number of job openings per unemployed worker. And this peaked in that red-hot labor market of 2021 and early 2022. Help wanted signs everywhere. Wage growth through the roof.

Since then, we have been on a long pattern of that eroding. And of course, we had a few different economic shocks along the way, things that moved it in one direction or the other.

But if we just think broadly, we are still coming down from that red-hot labor market, and, in our opinion, it's pretty much moving in one direction. Not falling off a cliff but just softening month by month. So that left side shows us that there's no longer more openings than there are workers, and it's kind of balancing out at a pretty decent level. It's probably why the unemployment rate has been flat for several months.

On the right-hand side, we're looking not at government data but at private-sector data. And we're looking not just at the level, how many jobs, but which direction and how quickly is it moving. And this statistical measure is related to the one on the left.

It's just showing us that we used to be fiery hot, now we're weakening just a little bit. So the question is, what's going to cause that to go the other way and for the labor market start to improve and accelerate? And we're not seeing a lot of those things behind the scenes right now, but stronger economic growth, stronger demand are certainly pushing things in the right direction.

And another way to look at this is what about on a sector-by-sector level? Again, looking at the entire economy, over the last few months, job growth has picked up. But let's look at it by individual sectors. Most of those jobs over the last couple of years have been contributed by the healthcare sector and hospitality and lower productivity roles.

Actually, in the information and tech sector, financial services, professional services, manufacturing, we have not only gained a slower growth of jobs, we have fewer jobs in those sectors than we did a couple months ago. So job declines in some sectors. And that's what we're showing on the right-hand side of this slide here, it's the payrolls diffusion index. So when we're at 50, the same number of sectors are gaining jobs and losing jobs. We like to see that number above 50. We like to see as many sectors as possible broadly contributing to job growth. We're basically right at 50 now. So even though job growth is positive, there are a lot of sectors that are still shedding jobs.

Phil: Yeah. Without healthcare particularly, which aging population, retiring of the baby boom, these big demographic shifts, without healthcare certainly we'd be losing jobs. If you look at this chart, definitely worth noting. And again, I should say something that we really hear among our healthcare clients that still can't find enough nurses, for example, really still a great labor market within healthcare.

So let's turn to the market and focus first on the S&P 500, of course, large-cap US stocks. We've had a recent drawdown. As of recently though, you can tell as you can see in the lower part, we're consistently hitting new all-time highs, taking a little bit of a pause, which is not that uncommon in the summer by the way, but still near all-time highs.

I should point out even with the recent drawdown which drew headlines, the S&P as of this recording is up 7.6% year to date, not quite halfway through the year. So annualize that in your mind, basically double it. It's a pretty great year. Unfortunately, markets don't work that way, but certainly a great year in the market, even with a recent pullback.

There's a few reasons why. A big reason remains the artificial intelligence theme. This is a chart we've shown in the past, but we have an update for you all. This is Cap Ex spending, capital spending on generative AI by the hyperscalers.

First of all, the numbers are pretty remarkable. We're looking at a trillion in 2027 estimated. But if we focus on that 2026 number, I want to show just how much these numbers are changing over the course of just months. January of this year, the estimate was $650 billion. By April, right, we had an earnings season. By April, that number was in the high $700s. By June, that number is now well into the $800s. So we are adding massive amounts of expected spending over the course of even 3-month increments.

Blake: We can't update this chart fast enough.

Phil: Exactly. Every time we look, the number goes up. And by the way, we have an earnings season around the corner, so we'll see if the number goes up or not.

A couple of points. One, just because you plan to put in near $900 billion this year doesn't mean that actually happens, right? There are chip constraints, there are land constraints, there are natural resource constraints.

So it's not that it's guaranteed that much is put in but just shows how massive this is for the US economy, keeping things like GDP resilient as we move forward. And of course, this is also helping to support the stock market as we showed. Additionally supporting the stock market, and this is not independent of AI but worth noting, is earnings. Earnings just continue to surprise. First quarter earnings were great as we covered before. We're about to enter second quarter earnings season. Expectations are for 22% earnings growth.

Now, calendar year 2026 expects 23% earnings growth. To put that in perspective, as of late last year, the 2026 estimate was 14%. Okay, so we are moving very quickly. The average earnings growth long term since 1950, 7.6%. So, we're tripling long-term average.

And you might say, "Oh, well, that's just margin expansion." As you can see on the right side. No. Revenue is really strong. Twelve percent in the second quarter, 11% in 2026, that is well above long term average.

And you might say, "Well, is this just the hyperscalers?" We'll talk about that more in a moment, but it's something we did point out. If you look at the first quarter, the 493 outside the Mag Seven, their earnings grew 17% in the first quarter. So yes, hyperscalers grew faster, but 17% is pretty remarkable growth. You are seeing a broadening in earnings. I think that that is playing out to a certain extent in the marketplace.

Blake: And earnings is what has driven the stock market rally this year. What this chart is showing is from the beginning of the year, what have professional analysts seen as the total year-on-year growth rate of earnings for the S&P 500? Starting the year, as you said, we started at about 14%.

Over the last 6 months, that has been revised higher and higher and higher at almost every juncture, up to 23% as you just said. So this is just a progression of what has happened this year. Notice the big step up starting in Q1 earnings season.

So we talk a lot about how much the stock market is up this year. We get a lot of questions about, is that sustainable? What's driving this? Is this valuation? Is it sentiment? It's a lot of things, but if it's only one thing you could pick, it has been earnings. And that's what this chart is showing.

You asked is it just the hyperscalers two slides ago? The answer is no. What this is showing is that the gold and gray bars here are the contribution to that earnings growth from the mega-cap tech companies and then in gray from the chip manufacturers. So there is a lot of earnings concentrated in those two sectors or two types of companies. However, the base of this chart, the blue, is everyone else, as you were just alluding to.

So all this chart is showing is that, yes, huge progression in earnings growth expectations, huge contribution from the mega cap tech companies and from just three chip manufacturers, but that is not the whole story. We have this solid blue base underneath, which is the rest of the index, and that also has been revised higher to a nice healthy, 10.5-percentage-points contribution.

Phil: That's right. Higher than long-term average. Of course, we want to see the rest of the S&P, that blue bar, continue to grow as a portion. If AI is going to be a productivity grower, it should. If it doesn't, I think that that is an indicator of a problem. The coming earnings season is going to be really important to watch that.

So on this point of price versus earnings, let's look at valuations. So here we're showing 12-month forward price to earnings ratio for the S&P 500. We're trading at about 20.5 times. So price 20.5 relative to every dollar of earnings. That is high historically if you look at long-term averages or if you look at sort of the 2016 to 2019 period. But what's interesting is it is cheaper today than it was on January 1st. Well, why is that?

Yes, the market's up over 7%, but earnings are growing much faster. So if the only thing you worry about is valuation, technically, you should like the stock market more today than you did on January 1st. Now, valuation cannot be the only thing you watch in the marketplace but just shows that earnings are growing so quickly that we actually have a market that's cheaper today than where it was in recent months. But certainly, you're not buying a market on discount.

Blake: Despite being up 7 or 8% this year.

Phil: That's right. It's pretty remarkable. And then let's talk about sort of those biggest names and everyone else. Yes, the top 10 names. By the way, they're certainly off their highs from a valuation price-to-forward-earnings perspective, but definitely more expensive than the other 490. And if you kind of draw a line since, say, 2016, the 490, they're expensive versus that average, but not dramatically, whereas those hyperscalers, you really saw the step up in 2020 and we stayed in that range. Why is that? A lot of it just has to do with unbelievable margins and earnings growth, and the market does pay more for those.

It doesn't mean there's not risk in the market. There is. But we have been talking about broadening for years now, and the concept that there are good companies that may not be as expensive outside of those biggest names. Price target, this is, remember, a 12-month price target. So when you look at this, you're thinking from now to the middle of next year, 8,000 is our base case in the S&P.

I won't dwell on this because we reset this last month and have not adjusted it. Up about 8.6% from today given the recent drawdown in the market. So certainly, we think the market can move higher, but a pause over the summer and some volatility right now, given how far we've come, especially in things like semiconductors, is not all that surprising. But as long as our earnings remain on track, we do think the market on trend can end up higher than where we are today.

Blake: And if you think back to that first slide that we showed at the beginning of the presentation, but everything has moved higher and yields are no exception.

What has moved the highest relative to the start of the year has been short-term interest rates. That's largely driven by that big repricing that we talked about of Fed expectations from moving from cuts to hikes. So as we can see toward the left part of this graph here, treasury yields down from 1 month up to the belly of starting about 3 years have moved up pretty substantially by about seven tenths of a percent.

Further out on the curve, yields have risen as well, not quite as much. So this would be a flattening of the curve. But these are pretty substantial moves. Look at where we were at the lows in February.

Look at where we were at the start of the year and then now. Rates are quite a bit higher. And that 10-year treasury yield is our benchmark interest rate, things that affect mortgages and lots of borrowing costs. That's a material change for that benchmark rate. Yields are higher, and that's something that we think is going to stay.

We have showed this chart a few times now, but we want to talk about it for another month. The 10-year treasury yield has been trading in a pretty narrow range of, call it, 4.25 to 4.5 for multiple years now. And we often get the question of when are yields, when are rates going to get back to normal? What is normal? Is normal that period in the 2010s or even into the early 2020s when rates were near zero and very low and mortgage rates were in the threes and fours?

Or is normal something more like the longer-term average? And that's where we are right now, is the 10-year treasury is trading well within that historical average of a number that starts with a four. So what we often say in response to that question is when are rates going to get back to normal? We often say maybe this is normal.

Phil: Higher for longer is certainly where we seek to be, given inflation north of 3%. It's hard to imagine a 10-year back at 0.5%, which is the summer of 2020.

Blake: We've got higher inflation, we've got stronger nominal growth and we have governments across the world in developed markets running enormous budget deficits in times of economic expansion, more treasury issuance applied to the market. All those things are drivers of higher rates, unless we see some structural changes there. We think that's probably here to stay.

All right. A fun slide to end on. We have this chart often thrown into presentations, and we never change this title. Stock markets typically recover—often quickly—after geopolitical disruption.

It's hard to believe, if you think in March and April when we saw a big stock market sell-off, a surge in oil prices and if you remember, the largest surge in geopolitical uncertainty by that quantitative index measure we track in 20 or 25 years.

However, stock markets typically recover quickly from geopolitical disruption, and that's what we can see adding the bottom line to this table here for the 2026 Iran war. It took about month for the stock market to bottom from its prewar peak, but it recovered very quickly and sharply. And after that ceasefire announcement was made, stocks rose in almost a vertical line, hitting new all-time highs almost every other day.

So it's just a reminder for long-term investors. I wouldn't say we want to look through geopolitical events. It's important to stay informed and to think about risks. But for long-term portfolios, we want to think well beyond what is happening just in these quarters and this year because trying to time a market around a geopolitical event, sure, maybe if you're lucky, you might be able to sell before that bottom. But where we see so much of the damage happen is investors who try to time markets around these events, and they miss that sharp repricing. And that's something that we've heard has unfortunately gone on around this event.

Phil: Yeah. And by the way, you don't have to look too far back in history for a reminder of the geopolitical events, the market tends, not always, but tends to look through pretty quickly.

Last year, it was the Liberation Day tariffs, right? The 90-day delay happens and the market rallies over 9% in one day. And then, of course, this period. Getting these things right is very difficult. But for those who just simply have the right allocation, have a plan, stick to their long-term investments and view them as long term, don't try to time things like equity markets, you eventually win in the medium and long term. So let's pause there and turn to questions.

Amy: Hey, before we jump into questions, I just want to remind you that we have several publications available throughout the month, and you can use the QR code on the screen or visit FirstCitizens.com/Wealth to get signed up to receive those in your inbox.

Well, Blake, Phil, thank you both so much for taking a deep dive into the markets and the economy as always. Lots going on, as you both mentioned. I can't believe we're already halfway through the year. Phil, we're coming up on another earnings season. What are you going to be watching for?

Phil: Yeah. There's a few things to watch for. As we already covered, of course, expectations are very high, 22% year-on-year growth. So estimate achievability, as we like to say, may not be as high as normal.

So first, what are the results? Of course, you have to watch that both top line and bottom line. In terms of things the market's going to obsess over, one, to no surprise, everything artificial intelligence is going to remain in focus.

What are the hyperscalers saying in terms of Cap Ex expectations? We showed a slide, and we can bring that up here of expectations continue to rise this year. Does that persist? More importantly with AI and something we're really focused on is not just the hyperscalers but other companies. If AI is going to drive productivity growth, it cannot just benefit the companies building AI, right?

And that is something we are very focused on. What is happening with earnings growth outside of those top 10 names? One thing to watch very closely, as I mentioned previously, first quarter earnings season was the best in quite some time in years for the other 493 stocks. So what are we seeing on that side as well?

And then of course, always keep an eye on guidance. Are companies trying to pull back analysts' expectations, or are they saying no? We really do expect the good times that the major shifts up we've seen in earnings expectations, the most recent two earnings season, do we see that persist?

So everything AI both on hyperscalers and is benefiting other companies, I should say, and, of course, guidance in addition to the results we'll be watching.

Amy: And Blake, there was a lot of buildup ahead of Chairman Warsh's first press conference. What stood out to you most from that Fed conference?

Blake: Chairman Warsh looks like he's going to be a reformer. The Fed has a broad mandate but a lot of institutional rigidity. So it's kind of an interesting combination, someone coming in who wants to rethink how to address that broad mandate of maximum employment and stable prices. What does that mean?

I mean, we know what one of them means is 2% inflation. That's what the committee has decided. And maximum employment has been a little bit of a moving target. And then also a moving target has been which of these two should we prioritize?

So again, as we mentioned, the thing that most stood out was that declarative focus on price stability.

But also, it was this openness to doing things a little bit differently, and that's that institutional rigidity point. He launched five different task forces looking at everything from communication to inflation, a signal a lot of openness to doing things differently. So we'll see how much that actually materializes. But it looks like an interesting and potentially market moving set of reforms.

And a lot of the change that we have seen again was around that communication. It reminded us with the passing of former Fed Chairman Alan Greenspan at age 100 this week, he was a big figure and he actually even though he did things his own way, he didn't used to communicate Fed changes to the market. They would just make a committee decision, and then the desk up in New York City would begin buying and selling securities on the open market. And it took Wall Street traders parsing the data flows to even guess what the Fed's change had been. He changed that by launching a statement, which was very brief.

So Warsh coming in looks like maybe he's going to be taking things in a new direction. Maybe that will do something different to address this last mile of inflation above target.

Phil: And something you pointed to was Greenspan for all of his ability, it was very difficult to parse what he meant. And when I started my career, he was chairman of the Fed. He did actually increase communication, as you mentioned, the Fed statement, for example, in 1994.

But we have only moved one direction, right? We added press conferences, then we added press conferences, which were quarterly originally, then we added them every meeting, we added this summary of economic projections.

We've moved to a place of, I think, and a word I think you used earlier, maybe a bit of overcommunication and seeing the new Fed chair come in and cut the statement in half and not submit a forecast to the summary of economic projections, his own personal forecast, I think that tells you something. I think maybe we're seeing a little bit of a rollback, and that's okay. Pendulum swing, I'll speak for myself, I think that the Fed telegraphing every Fed action removes some of their power.

One of the strengths of the Fed, which is not necessarily fun for people like you and me, is to surprise. And I think Greenspan was a master of that. We really have lost that, given rate moves are well telegraphed before they happen.

Blake: I think that's right. I was at a dinner on the side of a conference a few years ago, and a Fed official was talking about communication. I made the point that, well, sometimes I think the market gets confused. What do you think we can do to address some of this confusion from their communication? And she said, "I think that means the Fed should communicate even more." So a little bit of a difference coming pendulum swinging back.

Phil: Yeah, there's nothing in the dual mandate that says they need to tell us what they're going to do before they do it. And I think we might be moving back some of that overcommunication.

Blake: It might be exciting.

Phil: Absolutely.

Amy: Switching gears a little bit, one thing we've talked about and is taking over the media is just AI, tech stocks, IPOs, all of these things. Phil, what are your thoughts and what other things people should be watching?

Phil: Yes, certainly all eyes are on IPOs, which are AI-oriented, space-oriented as well. There are more announcements even this week of coming IPOs and ADRs.

Look, that's going to remain a major theme, but we're also looking elsewhere. Do not forget that year to date, and it's ebbed, it's flowed, but year to date, look at the Russell 2000, small cap stocks are well outperforming large-cap stocks.

If you look at the equal-weight S&P 500, which where every company in the S&P 500 has an equal weight, it's not weighted toward the largest companies, it's outperforming year to date. There are good companies. We have been positioned for broadening in terms of being overweight, things like small cap in our portfolios.

That I think remains a major theme. The other thing we pointed out we're showing here is that yields are quite attractive. Fixed income is still here. It's something we've certainly seen among our clients, but you are getting a lot more yield, certainly in the front end of the curve and also further out longer-term rates than you were even at the beginning of the year, certainly a lot higher than you were a few years ago.

So fixed income and balance in portfolios, that's a theme you don't hear as much about because everyone's so focused on equities and the IPO market, but that hasn't changed. And in fact, if you're looking for an entry point, fixed income is yielding more today than it was at the start of the year. Just something to think about.

Always look at your financial plan, always make sure you have the right buckets, but balance in portfolios is a theme that we think both within return generating assets, thinking diversification, international and outside the largest names, but also between fixed income and equity remains really important.

Amy: Great reminders. Thank you, Phil. Thank you, Blake. And thank you all for listening. We hope you found this information helpful. As always, we look forward to seeing you again next month.

Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Head of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

Jack Pettit | AVP Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

John.Pettit@FirstCitizens.com | 919-986-3667

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